Benchmarking

What is it?

Benchmarking is the process of comparing an entity’s strengths, weaknesses, business processes and performance metrics to its peers, competitors, industry leaders or best practices from other industries. Or, the systematic process of searching for best practices, innovative ideas and highly effective operating procedures that lead to superior performance. ^[8]

Benchmark studies are conducted to compare organizational practices against the best-in-class practices that exist within competitor enterprises in government or industry. Benchmarking is usually focused on strategies, operations and processes. This external focus is what separates benchmarking from similar process improvement strategies such as Total Quality Management (TQM), Performance Measurement, and Re-Engineering; which are internally focused within a firm.^[9]

Why do it?

In the process of benchmarking, management identifies the best firms or organizations in their industry, or in another industry where similar processes exist; and compare the results and processes of those studied (the targets) to the firm’s own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful.

The objective of benchmark studies is to determine how companies achieve their superior performance levels and use that information to design projects to improve operations of the enterprise. Additionally, the results of a benchmarking process can help firms identify where they have a competitive advantage and where they are weak in comparison to their peers or industry best practices.

Benchmarking helps to overcome paradigm blindness^[7], which can be summed up as thinking The way we do it is the best because this is the way we've always done it. Benchmarking opens organizations to new methods, ideas and tools to improve their effectiveness and performance.

In addition:

A SWOT Analysis can help identify targets of a benchmarking study.
A Benchmarking study may be done as part of a Potential Analysis.

How do I do it?

Step 1

First, decide on the type of Benchmarking study that is appropriate for the situation. The following are types of benchmarking studies: ^[2,4]

Process Benchmarking - Focuses on the observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Usually involves the creation of process maps to facilitate comparison and analysis. Often applied to back-office processes where outsourcing may be a consideration.
Financial Benchmarking - Involves performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity. May also be done from an investor perspective by extending the benchmarking universe to also compare peer companies that can be considered alternative investment opportunities.
Performance Benchmarking - Is usually focused on assessing a firm&s competitive position by comparing products and services with those of target firms (usually their direct competitors). This may be undertaken through a trade association or 3rd-party in order to protect confidentiality of the process.
Product Benchmarking - This is the process of assessing a firm’s current or designed products to current ones from competitors. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.
Strategic Benchmarking - Is usually undertaken as part of an effort to improve overall business performance by examining the long-term strategies and general approaches that have made other firms successful. This type of benchmarking is usually not industry-specific, meaning it is best to look at other industries.
Functional Benchmarking - This is a benchmarking assessment of a single function or process in order to improve the firm’s capabilities in that particular area. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison. These studies frequently involve firms that are not direct competitors, but who are stand-outs in the particular function being analyzed.
Internal Benchmarking - This involves benchmarking businesses or operations from within the same organization (e.g. business units in different countries). The main advantages of internal benchmarking are that access to sensitive data and information is easier; standardized data is often readily available; and, usually less time and resources are needed.
Energy Benchmarking -- This is the process of collecting, analyzing and relating energy performance data of comparable activities with the purpose of evaluating and comparing performance between or within entities.[6] Entities can include processes, buildings or companies. Benchmarking may be internal between entities within a single organization, or - subject to confidentiality restrictions - external between competing entities.

Step 2

Second, decide on the benchmarking process you will use. Overall, the benchmarking process is a cycle that looks like this:

However, there are two common benchmarking methods that I have come across. They are referenced below:

Camp Process

Robert Camp of Xerox recommended the following 12-step process in his 1989 book. ^[3] The Camp methodology consists of:

Select subject
Define the process
Identify potential partners
Identify data sources
Collect data and select partners
Determine the gap
Establish process differences
Target future performance
Communicate
Adjust goal
Implement
Review and recalibrate

Chang and Kelly Process

Or there is the 7-step process recommended by Chang and Kelly in their 1994 book: ^[5]

Identify what to benchmark
Determine what to measure
Identify who to benchmark
Collect the data
Analyze the data
Set goals and develop an action plan
Monitor the process

Step 3

Third, plan your benchmarking study. This involves: ^[6]

Deciding which processes, activities, or strategies will be benchmarked
Deciding which performance measures or metrics will be used
Identifying the type of information that will be needed or is available to conduct the study
Document the firm’s existing process for comparison to the benchmarks
Identify the targets to be benchmarked

Step 4

Fourth, gather data. This involves collecting the information that was identified in the planning step.

Step 5

Fifth, analyze the data: This involves: ^[6]

Compare the current process to the benchmarking data that was gathered
Agree on areas of competitive advantage, areas that need improvement, and processes or activities of the targets that should be considered for adoption or further evaluation
Agree on recommendations for specific actions or changes that should be made to improve weaknesses

Step 6

Sixth, take action on the benchmarking results. This involves: ^[6]

Communicate the results of the benchmarking study to stakeholders and agree on which (if any) of the recommendations will be moved forward
Develop a specific plan of action to implement the recommended changes
Implement the changes, while monitoring internal processes and benchmarks for progress and potential issues

Step 7

Seventh, review the results. This involves: ^[6]

Once the changes have been implemented, review the results and identify remaining bottlenecks
Communicate the results of the implemented changes to stakeholders

Step 8

Eighth, recalibrate metrics and plan further benchmarking studies. This involves:

As results are made, determine if metrics need to be changed or refined
Schedule further benchmarking studies to refine knowledge of best practices and identify areas of further improvement

What Should the Results be?

A sample Benchmarking Report that provides an excellent example is the Benchmarking Report on Business Process Analysis and Systems Design for Electronic Record Keeping, conducted by the National Archives and Records Administration (30 September, 2005)

Advantages

Benchmarking has several advantages:

It identifies new and innovative ideas that may not otherwise arise within a firm due to cultural and other factors
It can expand the focus of stakeholders from the narrow operational focus that many stakeholders may have by forcing them to look at the overall process, or bigger picture, and how their individual functions integrate into the larger process that was the subject of the benchmarking study
Benchmarking studies can frequently be low-cost exercises that enable a firm to identify and evaluate possible paths to improvement without having to first undertake those changes within the firm

Risks

Benchmarking can be a very time consuming process
Organizations may not have the expertise to conduct the analysis and acquire or interpret useful competitive information
Because it involves assessing solutions that have been shown to work elsewhere, with the goal of reproducing them, benchmarking cannot produce innovative solutions or solutions that will produce a sustainable competitive advantage
Deciding on appropriate targets for benchmarking studies can be difficult as what appear to be process strengths from outside the target may be due to other factors that are difficult to determine or measure
Acquiring valid and correct data can sometimes be very challenging

Tips

As a general rule, the process or function selected should be one of the most critical to your business strategy. ^[9]
It is very useful to have an explicit mission statement which documents the studies deliverables, purpose and metrics. ^[9]
Identify all stakeholders that may be affected by the project and secure their ideas, contributions, and support. ^[9]
Don't benchmark unless all those affected by likely changes are represented on the benchmarking team or are given opportunity to contribute their ideas and interests to the benchmarking process. ^[9]
Industry trade groups are usually a great place to start looking for information and targets.
Remember that some benchmarking results may be infeasible for a firm to emulate. For a smaller firm, choosing a company like Google as a benchmarking target may only be feasible if the area being benchmarked isn’t an activity that significantly benefits from Google’s financial and technical resources.

References

BABOK v2.0, Section 9.2 - Benchmarking
Wikipedia entry: Benchmarking (as of 7 Oct 2012)
Camp, R. (1989). The search for industry best practices that lead to superior performance. Productivity Press.
Business Strategy - Benchmarking, by Jim Riley for tutor2u.net
Basic Measuring and Benchmarking Techniques, on the Trinity Web Works Marketing Strategy Archives blog.
U.S. Postal Service Supplying Principles and Practices -- Benchmarking Analysis. Accessed on October 18, 2013.
Benchmarking, at Vectorstudy.com.
The Reengineering Revolution: A Handbook. By Hammer, M., and Stranton, S. New York: HarperCollins, 1995, pp. 11.
Benchmarking: Definitions and Overview, by Joseph Blakeman. Center for Urban Transportation Studies, University of Wisconsin -- Milwaukee. June 2002.

Related Resources

Benchmarking, in the Encyclopedia of Business, 2nd Ed.
Interview Questions - Benchmarking, on Modern Analyst
Business Analysis Technique #2 - Benchmarking, by David Kohrell, for TAPUniversity (27 May 2011)
What is Benchmarking? -- by Business Performance Improvement Resource, www.BPIR.com
Pros and Cons of Benchmarking, by N. Nayab, on Bright Hub. August 2010.
Why Benchmark Your Organization’s Operations?, by Caturano and Company.